"Life is short, but truth works far and lives long; let us speak truth." -- Schopenhauer

Tuesday, September 02, 2003

“Do we need regulation? Can you imagine a world without it?”

By M. Devlin Cooper

These were among the opening words of the second meeting of my Perspectives on Regulation class at George Mason University School of Law on Wednesday. For those liberty-oriented people reading, stop thinking that the Mason campus is running rampant with libertarians. I’ll write more about why later, but for now, stop it. You drive me, and many other liberty-oriented folks at the school, crazy! It’s better than most places, but outside of the economics department, the rest of main campus in Fairfax is pretty much like mainstream academia. Not to mention, the law school is actually in Arlington (not on main campus) and is fairly conservative. It’s libertarian in so far as the Chicago School is libertarian, which really means its quasi-libertarian. It’s almost libertarian. It’s the one-calorie of libertarianism.

Yet I digress. Back to regulation we go; hi ho, hi ho. I’m not a big Beatles fan or John Lennon fan for that matter, but I can’t help but think of the words, “Imagine there’s no heaven. It’s easy if you try.” Well, try this one on for size, “Imagine there’s no regulation. It’s easy if you try.”

I mean, how can you not imagine a world without regulation if you try? There have certainly been more outlandish ideas. It wasn’t like dreaming in the 1950s of putting a man on the moon was exactly a mainstream thought. But given that we were able to actually pull that one off, don’t you think we can eliminate all government regulation? And don’t people have enough of an imagination to dream of a world without government regulation regardless of how realistic it truly is? I mean, I know its law school, but God, it’s not that difficult.

But, what can we say about this issue of needing regulation? Simple. We need government regulation of the market like young boys need to be raped by Catholic priests—not at all.

There are generally five theories about why we need government regulation:

(2) The Capture Theory—Producers actually have a demand for regulation in order to try to capture greater market shares themselves,

(3) The Stigler Model—The government has the power to coerce, and interest groups actually want to convince the government to exercise their coercive power in order to benefit the interest groups,

(4) The Pelzman Extension of the Stigler Model—Pelzman mainly extended Stigler’s theory by noting that legislators want to stay in office, and they are willing to offer favorable legislation to interest groups in return for political support, and

(5) The Becker Model—You might see greater regulation in areas where there are market failures because in instances of severe market failures, there may be more to gain by regulation.

Now, I don’t want to go through the normal critiques of these models found in mainstream texts and even in this class; you can do that later on your own time. Instead, I just want to note a few things. First, what the hell is a market failure? A market failure is nothing but a voluntary transaction that the government or some interest group just doesn’t like. There’s no such thing as a market failure.

If two parties engage in voluntary transaction, where’s the failure? If a person’s actions are harmful to another’s property rights, then the civil justice system should allow for the complete compensation of the victim by the tortfeasor, and this compensation resolves the market failure. Not to mention, certainty within the legal system that a property rights violation will result in compensation by the injurer to the victim will force most injurers to internalize the potential externalities and take adequate precautions.

Market power itself is a misnomer. Yes, producers have market power. But so do consumers. Prices don’t exist in a vacuum. This was a basic insight of the late Ludwig von Mises and was the basic reason communism did not last in the Soviet Union. Prices are set through the interactions of consumers and producers; there are no price takers and no price givers, only price bargainers.

Natural monopolies are irrelevant. There has never been a true natural monopoly, and there’s no reason why if we ever did see one that we should entrust its control to an even bigger monopoly—namely, the government.

Asymmetric information is irrelevant as well. Everyone assumes risks when they enter into voluntary transactions. Suck it up consumers! If you don’t want to deal with asymmetric information, invest more in research!

As for the rest of the theories, they are great, intuitive insights into why we have regulation, but they don’t tell us why we need regulation. And therein lies the problem. We are socialized all through our lives to believe that we need the benevolent government to show us the way, but we have no basis for believing this other than blind faith in government, which is nothing but a monopoly in and of itself. Free your minds. At least step back and make an honest effort to understand the alternatives.

Don’t get me wrong. I am a staunch believer in the need for regulation just like my counterparts at Mason Law. It’s just that my version of regulation is a bit different. But my version is simpler. We need to regulate the biggest of all monopolies, the United States government. We should regulate their revenues more closely—their taxes; regulate their expenditures more closely; and if possible, dispose of their monopoly power completely.

Why am I such a staunch opponent to regulation? Because I am such a staunch supporter of the consumer. Consumers are not stupid. They don’t need the government to pamper them and coddle them. Not to mention, most regulations usually just mess things up worse. Further, if consumers can’t act on their own without failing, why on earth would government officials do any better?

Imagine there’s no regulation. It’s easy if you try. Given my experiences, that would at least be a start in the right direction. Then, maybe we’ll actually be able to start thinking about regulation more sensibly and talk about the advantages of truly free markets.